Reinstatement Cost Assessments: Your Questions Answered

There are a lot of considerations that need to be made when managing a block or property. From collecting service charges to managing everyday maintenance, an effective block manager will wear many hats. But one consideration that may often go unnoticed is the importance of Reinstatement Cost Assessments. In this post, we take a deep dive into Reinstatement Cost Assessments, answering all the most important questions, from what they are to how they work for different property types.

What is the ‘Reinstatement Cost’?

Put simply, the ‘Reinstatement Cost’ is the amount it would cost to, hypothetically, completely reconstruct a building to modern building regulations while keeping the standard of fit-out and visible exterior essentially the same. An accurate property value assessment is important for ensuring that the building in question is correctly insured.

How is the ‘Reinstatement Cost’ calculated?

A Reinstatement Cost Assessment (RCA) involves a number of measurements, including the ‘International Property Measurement Standard 1’, determining the footprint of each floor in the building, and examining both internal and external building components with consideration to the structural composition of the building.

The surveyor will then carry out an ‘elemental take-off’ to determine a rough figure for what all the parts of the building would cost. This forms the basis of the ‘raw calculation’. A measure of inflation called the ‘Tender Price Index’ as well as a relevant Location Factor (LF) Index (when applicable) are then applied to this raw calculation. Finally, demolition costs, planning and statutory fees, and VAT on these elements are all added on to derive the final ‘Declared Value’ (DV).

Declared Value vs Sum Insured

The ‘Declared Value’ (DV) is the full reinstatement value of the property, as calculated by your surveyor – it is this value that is presented in the RCA report. In contrast, the ‘Sum Insured’ (SI) is determined by the insurer of the building. The SI is simply the DV plus a provision for inflation (typically between 20% and 50% of the DV).

How does the Declared Value affect the insurance premium?

The insurer of the building will work out the premium paid by multiplying the Declared Value by a set rate:

For example, DV (%2,000,000) x 0.1% = £2,000

To this premium, an insurance premium tax (IPT) is also added (currently 12% for buildings insurance). This would take the total in the example premium above to £2,240.

For some buildings, terrorism insurance may also be applied. This means multiplying the DV by a different rate to calculate a separate terrorism insurance premium. This premium is also subject to insurance premium tax.

Is the Declared Value related to the market value of the property?

To put it simply – no. The market value of a property is usually very different from the reinstatement cost or declared value. Usually, the market value of the property is much higher than the rebuild cost, due to considerations such as location.

Commonly used terms in an RCA Report

Building Reinstatement Value – the amount it would cost to essentially rebuild a property from scratch.

Building Reinstatement Cost Assessment – the assessment that is carried out to determine the Reinstatement Cost of any given property.

Insurance Valuation – a valuation used to ensure your building id insured for the correct amount.

Fire Insurance Valuation – a term used by older leases and some lenders (essentially the same as the Reinstatement Cost Assessment).

Whose responsibility is it to commission an RCA?

In the case of residential properties, the responsibility of commissioning an RCA usually falls to the managing agent on behalf of the landlord; however, some landlords may retain this responsibility themselves.

While it is not a legal requirement to commission an RCA on a residential or commercial property, in multiple-occupancy buildings with leaseholders and/or tenants there will be agreements in place that make it worthwhile for the freeholder to ensure the building is insured for its full reinstatement cost. Furthermore, many insurers will require RCAs for listed buildings or buildings worth in excess of £600,000 (which includes most multiple occupancy blocks).

How often should an RCA be carried out?

According to the Royal Institute of Chartered Surveyors (RICS), a Reinstatement Cost Assessment should be conducted every three years, or earlier should alterations be made to the building. It is also recommended that annual adjustments be made to “reflect inflationary effects”.

A managing agent or Block Manager may use index linking of the DV imposed by the buildings insurer or otherwise instruct a surveyor to carry out a desktop review of the building if no changes have been made. Updating the DV annually often helps Block Managers and other property managers to more effectively and accurately manage budgets.

What is required when commissioning an RCA?

When commissioning an RCA, the Block Manager or responsible person should be able to provide a copy of the latest health and safety/fire risk assessment for the property in question, Asbestos surveys are also required as the presence of asbestos can have a significant impact on the DV of the property. Plans and drawings of the building can also be useful to the surveyor conducting the RCA.

What should be done with an RCA?

Once an RCA has been conducted, a Block Manager will inform the client (the Freeholder or landlord) as it is their development and, ultimately, their decision as to what it should be insured for. It is standard practice for the Block Manager to also inform their insurance broker of the new DV as determined by the RCA. The broker will then liaise with the insurance underwriter to apply the new figure.

Most insurers will apply the new DV immediately. This may mean that an invoice will be issued for an uplift in the insurance premium if the DV has gone up. On the other hand, if the DV has decreased, a credit will be issued from the insurer and the new DV will be applied when the policy renews.

What if the new DV is significantly different to the old DV?

There can be a number of reasons that the new DV is wildly different to the previous valuation. The most common reason is a difference in the form of analysis used by the surveyor. For example, the previous surveyor may have used a more generic ‘functional cost unit rate’ method, while the new DV may have been calculated using a more accurate form of analysis. This can lead to significant changes in the reported DV.

This discrepancy can often be resolved by checking the differences between the old and the new RCA. However, if it is still unclear why the DV has changed so significantly, further investigation and communication with the surveyor who conducted the assessment may be necessary. All of this is typically handled by the Block Manager responsible for commissioning the RCA.

For residential blocks, is an inspection of each flat necessary?

For blocks containing multiple flats or apartments, access to a representative property within the block is usually sufficient for calculating an accurate DV.

At Horizon Management, our experienced Block Managers can commission and liaise with the best surveyors to ensure Reinstatement Cost Assessments are carried out on a regular basis. We adhere to the strict regulations of the Royal Institution of Chartered Surveyors to make sure your block is managed to the highest standard. Get in touch with a member of the Horizon Management team today to find out how we could help with the management of your development.